RESERVE PETROLEUM CO - Quarter Report: 2021 March (Form 10-Q)

PART I – FINANCIAL INFORMATION

ITEM 1.         CONSOLIDATED FINANCIAL STATEMENTS

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED BALANCE SHEETS

ASSETS

See Accompanying Notes

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

See Accompanying Notes

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See Accompanying Notes

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

See Accompanying Notes

THE RESERVE PETROLEUM COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Accompanying Notes

THE RESERVE PETROLEUM COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

ITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read with reference to a similar discussion in the 2020 Form 10-K, as well as the consolidated financial statements included in this Form 10-Q.

Forward-Looking Statements

This discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.

Although management believes the expectations in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward-Looking Statements” on page 3 of the 2020 Form 10-K.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information because of new information, future developments, or otherwise. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

Financial Conditions and Results of Operations

COVID-19

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas. As a result, the price for oil decreased significantly. While oil prices have recovered to pre-pandemic levels, world demand has not and there is still ongoing volatility in the market.

Our profitability has been and will likely continue to be significantly affected by this volatility. A decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets, equity method investments and right-of-use assets. It is likely that additional impairments could be triggered if the COVID-19 pandemic leads to a continued and sustained reduction in global economic activity and demand for energy. We continue to evaluate all cash management strategies, maintaining conservative choices in short-term investments to protect cash reserves and liquidity.

Liquidity and Capital Resources

Please refer to the Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first quarter of 2021, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operations of $408,694. The Company had maturities of available-for-sale debt securities of $1,515,234 and sales of equity securities of $700,602 for total cash provided by investing activities of $2,215,836. The Company utilized cash for the purchase of property of $637,236, purchase of equity method investments of $10,000 and purchase of equity securities of $1,036,150 for total cash applied of $1,683,386. Cash and cash equivalents increased $939,559 (6%) to $17,126,644.

Discussion of Significant Changes in Working Capital. In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31, 2020. A discussion of these items follows.

Equity securities increased $394,857 (16%) to $2,931,339 as of March 31, 2021 from $2,536,482 at December 31, 2020. The increase was the result of $335,548 in net purchases, a $4,008 decrease in the equity securities’ market value and a $63,317 net gain from these securities.

Refundable income taxes increased $96,671 (44%) to $314,875 as of March 31, 2021 from $218,204 at December 31, 2020.

Accounts payable decreased $60,969 (25%) to $187,085 as of March 31, 2021 from $248,054 at December 31, 2020 due to timing differences in the processing of accounts payable.

Discussion of Significant Changes in the Condensed Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $408,694 in the three months ended March 31, 2021, a decrease of $281,213 (41%) from the comparable period in 2020 of $689,907. For more information see “Operating Revenues” and “Other Income, Net” below.

Cash applied to the purchase of property additions in the three months ended March 31, 2021 was $637,236, an increase of $582,998 from cash applied in the comparable period in 2020 of $54,238. For 2021, cash applied to property additions related to oil and gas exploration and development activity was $307,236 and $330,000 was related to equipment purchases. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.

Cash applied to the purchase of equity securities in the three months ended March 31, 2021 was $1,036,150, compared to $355,881 in the comparable period in 2020. Cash provided by the sale of equity securities in the three months ended March 31, 2021 was $700,602, compared to $292,677 in the comparable period in 2020. The Company is increasing equity securities as part of a strategy to offset the loss of interest income in the depressed available-for-sale debt securities environment.

Conclusion. Management is unaware of any additional material trends, demands, commitments, events or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in the 2020 Form 10-K would not be representative of the Company’s current position.

Results of Operations

Net income increased $1,401,422 to a net income of $259,466 in the three months ended March 31, 2021 from a net loss of $(1,141,956) in the comparable period in 2020. Net income/(loss) per share, basic and diluted, increased $8.95 to a net income per share of $1.66 in the three months ended March 31, 2021 from a net loss per share of $(7.29) in the comparable period in 2020.

A discussion of revenue from oil and gas sales and other significant line items in the consolidated statements of operations follows.

Operating Revenues. Revenues from oil and gas sales increased $404,192 (34%) to $1,600,454 in the three months ended March 31, 2021 from $1,196,262 in 2020. Of the $404,192 increase, crude oil sales increased $154,365; natural gas sales increased $229,982; and miscellaneous oil and gas product sales increased $19,575.

The $154,635 (19%) increase in oil sales to $989,228 in the three months ended March 31, 2021 from $834,593 in the comparable period in 2020 was the result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 1,460 Bbls to 18,841 Bbls in the three months ended March 31, 2021, resulting in a positive volume variance of $70,109 compared to the comparable period in 2020. The average price per Bbl increased $4.48 to $52.50 per Bbl in the three months ended March 31, 2021, resulting in a positive price variance of $84,526 compared to the comparable period in 2020.

The $229,982 (72%) increase in gas sales to $550,836 in the three months ended March 31, 2021 from $320,854 in the comparable period in 2020 was the result of a decrease in the volume sold and an increase in the average price per thousand cubic feet (MCF). The volume of gas sold decreased 7,877 MCF to 181,820 MCF in the three months ended March 31, 2021 from 189,687 MCF in the comparable period in 2020, for a negative volume variance of $(13,312). The average price per MCF increased $1.34 to $3.03 per MCF in the three months ended March 31, 2021 from $1.69 per MCF in the comparable period in 2020, resulting in a positive price variance of $243,294.

Sales from the Robertson County, Texas royalty interest properties provided approximately 24% of the Company’s gas sales volumes for the three months ended March 31, 2021 and 28% of the gas sales volumes for the comparable period in 2020. See discussion on page 11 of the 2020 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 12% of the Company’s gas sales volumes for the three months ended March 31, 2021 and about 11% of the gas sales volumes for the comparable period in 2020.

For both oil and gas sales, the price change was mostly the result of a change in the spot market prices upon which most of the Company’s oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.

Sales of miscellaneous oil and gas products increased $19,575 (48%) to $60,390 in the three months ended March 31, 2021 from $40,815 in the comparable period in 2020.

The Company received no lease bonuses in the three months ended March 31, 2021 for leases on its owned minerals compared to $82,221 in the comparable period in 2020.

Operating Costs and Expenses. Operating costs and expenses decreased $1,210,616 (47%) to $1,361,545 in the three months ended March 31, 2021 from $2,572,161 in the comparable period in 2020. The decrease was primarily due to the significant impairments in the 2020 period.

Production Costs. Production costs decreased $24,008 (4%) to $526,559 in the three months ended March 31, 2021 from $550,567 in the comparable period in 2020. This decrease was primarily the result of a decrease of $67,171 in lease operating expense, offset by an increase of $32,093 in production tax and an increase of $10,952 in hauling and compression expenses.

Exploration Costs. Total exploration expense decreased $27,275 (63%) to $16,190 in the three months ended March 31, 2021 from $43,465 in the comparable period in 2020.

The following is a summary as of May 7, 2021, updating both exploration and development activity from December 31, 2020, for the period ended March 31, 2021.

The Company is participating with its 14% interest in drilling on a Creek County, Oklahoma 3-D seismic project. At the start of 2021 there were six active prospects within the project. An exploratory well was drilled on one of the prospects and completed as a dry hole. A development well was drilled on another prospect and a completion is in progress. An additional exploratory well and four additional development wells are expected to be drilled starting in May 2021. Prepaid costs for the period were $35,978.

The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. Most of the acreage is underlain by a shallow heavy oil zone. The Company is participating with a 17.5% interest in the re-entry, completion and testing of a previously drilled test well on the prospect with the intention of conducting a thermal recovery pilot test. Prepaid costs for the period were $26,722.

The Company has been participating with a 13% interest in a 3-D seismic project covering approximately 35,000 acres in San Patricio County, Texas. At the start of 2021 there were six active prospects within the project. An exploratory well was drilled and completed on one of these in 2020, testing gas at a commercial rate. It is shut in awaiting pipeline construction. The Company is participating in the conversion of an abandoned producer to a saltwater disposal well that will handle water from this well and two other previously drilled producers on the project, and any future wells drilled in the area. Additional exploratory well proposals are anticipated in 2021. Prepaid costs for the period were $28,578.

The Company has been participating with a 50% interest in the development of a Nolan County, Texas prospect. The Company and its partner have acquired 3,182 net acres of leasehold and three producing wells on the prospect and are currently involved in efforts to sell a portion of their interest. Once sufficient interest has been placed, an exploratory horizontal well will be drilled on the prospect. Geological costs for the period were $11,250 and capitalized costs were $222,714.

The Company is participating in the completion of four horizontal development wells that were drilled in 2020 on fee minerals located in Kingfisher County, Oklahoma. The Company has a 3.2% working interest in three of the wells and a 3.5% working interest in the fourth. Actual costs of $2,543 for the period were offset by prepaid costs from 2020 for a net capitalized amount of $0.

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $1,280,879 (84%) to $245,125 in the three months ended March 31, 2021 from $1,526,004 in the comparable period in 2020. The decrease was from long-lived asset impairments in the 2020 period of $1,312,328 due to historically low oil futures prices at March 31, 2020.

General, Administrative and Other (G&A). G&A increased $121,546 (27%) to $573,671 in the three months ended March 31, 2021from $452,125 in the comparable period in 2020. The increase was primarily due to accounting services and consulting costs related to implementation of new accounting software.

Other Income, Net. Other Income, Net increased $66,133 to $86,944 in the three months ended March 31, 2021 from $20,811 in the comparable period in 2020. See Note 3 to the accompanying consolidated financial statements for the various components of Other Income, Net.

Income Tax Provision. In the three months ended March 31, 2021, the Company had an estimated income tax provision of $67,472 as the result of a deferred tax provision of $163,675 and a current tax benefit of $96,203. In the comparable period in 2020, the Company had an estimated income tax benefit of $166,111 as the result of a deferred tax benefit of $346,421 and a current tax provision of $180,310. See Note 5 to the accompanying consolidated financial statements for additional information on income taxes.

Off-Balance Sheet Arrangement

The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 4 to the accompanying consolidated financial statements.

Not applicable.

As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II – OTHER INFORMATION

During the quarter ended March 31, 2021, the Company did not have any material legal proceedings brought against it or its properties.

Not applicable.

None.

None.

Not applicable.

None.

The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.